Client Update: New qualified foreign institutional investors regulations
20 October 2009
In brief: The State Administration of Foreign Exchange of the People's Republic of China recently published the Provisions for Foreign Exchange Administration on Domestic Securities Investment by Qualified Foreign Institutional Investors, which replace the previous Interim Provisions. Partner Campbell Davidson and Senior Associate Troy Zhang look at the key changes.
China first permitted qualified foreign institutional investors (QFIIs) to invest in listed domestic securities denominated in local currency in 2002. That year, the State Administration of Foreign Exchange (SAFE), China's foreign exchange controller, issued the Interim Provisions for Foreign Exchange Administration on Domestic Securities Investment by Qualified Foreign Institutional Investors (the Interim Provisions). The Interim Provisions empowered SAFE to approve the QFIIs' investment quota. The Interim Provisions also provided for the establishment of foreign currency and local currency accounts, use of custody services, currency conversions, and payments into and out of China by QFIIs.
The Interim Provisions have now finally been replaced by the Provisions for Foreign Exchange Administration on Domestic Securities Investment by Qualified Foreign Institutional Investors (the New Provisions). The New Provisions are dated 29 September 2009, the date on which they took effect.
As a result of SAFE's experience over the past seven years and its having canvassed public opinion on their formulation, the New Provisions contain the following significant developments.
- The maximum limit on the quota applicable to a single QFII is increased from US$800 million to US$1 billion.
- QFIIs in the form of pension funds, insurance funds, mutual funds, charity funds, donation funds, and government or monetary authorities are expressly recognised, as are 'Open-ended China Funds' (defined as open-ended securities investment funds established overseas by a QFII through public issue, where at least 70 per cent of the assets of the fund are to be invested in China).
- Separate accounts may be permitted to be opened by a QFII for its own funds and for funds under its management. If a QFII establishes more than one Open-ended China Fund, different accounts are to be established for each.
- The lock-up period (ie the period during which the principal amount invested is restricted from being repatriated outside of China) applicable to the QFIIs that are pension funds, insurance funds, mutual funds, charity funds, donation funds, government or monetary authorities and Open-ended China Funds is three months, starting from the date of remittance of the full amount of the principal. Other types of QFIIs are subject to a one-year lock-up of their principal investment.
- After the lock-up ends, Open-ended China Funds have greater flexibility than other QFIIs with respect to remittances into and out of China.
- Furthermore, remittances by Open-ended China Funds may be made by the relevant custodian without SAFE's prior approval, provided that the amount of such a remittance is not more than US$50 million. The custodian is required to make a filing with the relevant branch of SAFE afterwards.
Generally speaking, compared with the Interim Provisions, the New Provisions give the QFIIs and their custodian banks much clearer guidance in dealing with funds and the foreign exchange regulator. Efforts to streamline the administrative procedures have also been made. Although the New Provisions are yet to be tested by implementation, they are a positive step by the Chinese Government in further opening China's capital markets to international investors.
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